When Art Meets Science: The Challenge of ROI Marketing

PCs and RetailingWharton accounting professors David Larcker and Christopher Ittner have had several experiences developing ROI marketing metrics for companies. In one case, a manufacturer of personal computers was losing market share. The company had identified two shortcomings that needed to be addressed by fine-tuning its pricing strategy and by improving the quality of its monitors.

“Car manufacturers would like to be better at measuring advertising results. But it is tough for them to do this as well as a savvy consumer goods company does.”

Ittner and Larcker, however, conducted a study that showed that the company had made some erroneous assumptions when it came up with this strategy. What customers really wanted was the ability to buy computers that were not going to be obsolete in a matter of months; they wanted computers that had enough features to give the products a longer life. The company responded to consumers’ concerns by, among other things, beefing up each computer system’s memory and improving its software. The result was increased customer loyalty, word-of-mouth praise and improved earnings.

In consulting for a big-box retailer, the Wharton researchers faced a more complicated situation. The retailer — call it Big Box Inc.— had been using a typical mix of TV, radio and newspaper advertising as well as in-store promotions (old chestnuts such as “buy one, get one free”). However, it had never attempted to assess to what extent its ad dollars were increasing profits. An analysis by Ittner and Larcker found that Big Box obtained more benefits from TV than from radio and newspapers. That was the good news; the bad news was that none of the three ad venues generated enough revenue to offset the cost of the ads.

But for Larcker, the larger point of the study was about the difficulty of measuring marketing initiatives, especially for a large company with stores spreading from Connecticut to south Texas, and whose marketing campaigns were largely regional in nature and overseen by different managers. “The interesting thing for me was the company had employees who did piecemeal marketing analysis, but they had never done a comprehensive analysis before,” Larcker says. “We had to link together data from separate parts of the organization on when the company spent money on ads and how much it spent. And we had to track unit sales for each store after the ads appeared.”

It turned out to be a major task to pull the data at store level and link that to when the advertising was occurring. People were not sharing data, which made it difficult to make assessments about the return on marketing investments. Larcker says this is typical in organizations.

A Disney StoryWharton marketing professor Z. John Zhang stresses that companies trying to measure returns on marketing investments need to be careful they do not lose their customer focus. His advice: Do not measure something just to say it can be done; companies should always view metrics as a way to generate business insights and to bolster and invigorate their overall customer-focused strategies.

A good example of a strategic initiative inspired by marketing analysis occurred during Michael Eisner’s early years as chief executive at Disney. Instead of asking how a division’s profitability could be improved, Eisner asked: How much did a family spend on a vacation and what percentage of that amount could Disney capture? To address that question, Disney had to move from using product-centric metrics to customer-centric metrics. It turned out that Disney was not capturing nearly enough value from vacation spending, even though its theme parks were quite profitable. Disney’s theme parks were primary destinations for vacationers, who spent an average of, say, $3,000 on their vacations in Orlando, but Disney was capturing only 25 percent of that spending; the rest went to airlines, taxis, hotels and restaurants.

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